MIT Study Says Patent Trolls Kill Innovation

A new study from MIT shows that what's good for lawyers and patent trolls hurt innovation.

Patent Assertion Entities (PAEs), commonly known as "patent trolls," have only one goal in mind: squeeze the patents to their maximum revenue potential in licensing fees.

While the effect of excessive litigation from PAEs has been linked to a drop in the ability of startups to get funding, empirical research of the actual effect has been insufficient, until now. Research done by Catherine Tucker, associate professor of Management Science at MIT Sloan School of Management, shows clearly that excessive litigation brought by PAEs has slowed the rate of investment in innovation, especially in technology companies.

Venture capital (VC) investment would "have likely been $21.8 billion higher over the course of five years but for litigation brought by frequent litigators," according to Tucker's paper, commissioned by the Computer & Communications Industry Association. She found this is especially true for software and communications startups, the ones most likely to face litigation from patent trolls. Legal fees and settlements for this type of litigation were between $3.77 billion and $18.9 billion in 2012.

Last month I wrote about the European Commission's landmark decision to prohibit Motorola from seeking an injunction against Apple for using its GSM patents. The Commission also made an agreement with Samsung, which commits not to seek injunctions for five years in Europe on the basis of Standard Essential Patents for smartphones and tablets against any potential licensee who agrees to accept a specified licensing framework. While in Europe the Commission is actively negotiating and regulating patent litigation, in the US there's no equivalent body working to achieve the same end.

I asked Professor Tucker for her thoughts about a framework to reduce the impact of patent trolls. She said:

As an economist, I would tend to think that the best way of addressing these issues are perhaps by addressing the relative asymmetries of costs faced by the litigating parties. It is cheap to send a demand letter. But very expensive to respond to a demand letter in terms of discovery costs and hiring legal counsel. It may be appropriate to allow some fee-shifting which would require the closing party in a patent infringement lawsuit to pay the costs incurred by the prevailing party. That would then place the onus on the plaintiff rather than courts to determine if they think the patent has merits.

This is one of the main differences between Europe and the US. In European courts the closing party has to pay the prevailing party's legal costs, while in the US each party pays their own. Also the European Union is creating the Unitary Patent and Unified Patent Court. When enacted, companies will have to plead their cases to the UPC, which will be specifically prepared to deal patent cases.

European Standard Patents often require a FRAND ("Fair" Reasonable and Non-Discriminatory) licensing commitment, making it easier for technology companies to get access to essential standard patents at a reasonable cost, without worrying about future litigation.

Another approach mentioned in Professor Tucker's paper is to raise the threshold of what can be patented. "One possibility is that because not all patents are for equally innovative inventions, a reduction in patent grants could be achieved by increasing the threshold of what is considered patentable," she writes. "Inventions that are also patented in the E.U. and Japan generally have to meet a higher threshold for innovation than patents registered only in the U.S. To investigate this further, we deﬁne as ‘triadic patents’ in our data those that have been approved by the U.S. Patent and Trademark Office, the European Patent Office (EPO), and the Japanese Patent Office (JPO)."

I'm not against lawyers and patent lawsuits, there are both necessary to protect legitimate IP and innovation. But patent trolls are a different issue. The Obama administration has been trying to help small companies fight litigation against them and considers this a very serious threat to innovation.

"How big of a problem are patent trolls? Consider this: last year [2012] we estimate that patent trolls sent out over 100,000 demand letters, threatening everyone from Fortune 500 companies to corner coffee shops and even regular consumers to pay a settlement or face a day in court. The number of these suits has exploded in recent years. " Gene Sperling, Former Director of the National Economic Council and Assistant to the President for Economic Policy, wrote on the White House blog last year.

He introduced a White House report on the impact of PAEs showing that "In the last two years [2011-2012], the number of lawsuits brought by patent trolls has nearly tripled, and account for 62% of all patent lawsuits in America. All told, the victims of patent trolls paid $29 billion in 2011, a 400% increase from 2005 — not to mention tens of billions dollars more in lost shareholder value."

So...lawyers stifle innovation and retard progress? Wow. You mean that if you put a leach on a host the host will be impaired. Shocking.

Okay, maybe I shouldn't be so cynical. I'm glad somebody put some empirical evidence behind what seems all too obvious. After all, it's not called the "Department of Business Prevention" for nothing.

Then again, the optimist in me compels me to ask my US colleagues if these trolls are actually doing America a favor. Maybe not the Americans we'd like to see (us) but at least some Americans. Over the last 20 years, in our lust for low-cost manufacturing, we have sent a boatload of manufacturing and technical IP (future dollars) over to Asia, specifically China. Maybe if a portion of that coin re-shores then we can at least call that a win for the home team? Even though we in the technical or manufacturing sector aren't scoring the runs can we at least be happy for the other hitters on the team? In another sports analogy, it's kind of like a Redskins fan cheering for the Giants in the SB because it's a little less painful than watching the Patsy's run away with another one.

So...lawyers stifle innovation and retard progress? Wow. You mean that if you put a leach on a host the host will be impaired. Shocking.

Okay, maybe I shouldn't be so cynical. I'm glad somebody put some empirical evidence behind what seems all too obvious. After all, it's not called the "Department of Business Prevention" for nothing.

Then again, the optimist in me compels me to ask my US colleagues if these trolls are actually doing America a favor. Maybe not the Americans we'd like to see (us) but at least some Americans. Over the last 20 years, in our lust for low-cost manufacturing, we have sent a boatload of manufacturing and technical IP (future dollars) over to Asia, specifically China. Maybe if a portion of that coin re-shores then we can at least call that a win for the home team? Even though we in the technical or manufacturing sector aren't scoring the runs can we at least be happy for the other hitters on the team? In another sports analogy, it's kind of like a Redskins fan cheering for the Giants in the SB because it's a little less painful than watching the Patsy's run away with another one.

The question presented is whether these claims are patent-eligible under 35 U. S. C. §101, or are instead drawn to a patent-ineligible abstract idea. We hold that the claims at issue are drawn to the abstract idea of intermediated settlement, and that merely requiring generic computer implementation fails to transform that abstract idea into a patent-eligible invention.

"From 2004 through 2012, patent lawsuits in the U.S. more than doubled, from around 2,500 to over
5,000 annually" It is now well known that the increase in lawsuits is in large part a result of the AIA legislation passed by Congress. Instead of decreasing patent infringement lawsuits as intended, it actually caused an increase. See http://www.sgrlaw.com/resources/trust_the_leaders/leaders_issues/ttl31/1779/. It is a classic example of a lobbyist driven rush to legislate by Congress without considering the long term effects of that legislation. Congress almost did it again this year but the lobbyist proposed legislation was stopped when other more pressing matters came up.